To the Ramparts on Tax Exemption

Let there be no doubt that credit unions’ federal tax exemption is something our industry is going to have to fight for in order to keep.

Consider what happened in Washington on Nov. 14. Rep. Dennis Ross (R-Fla.), a lawmaker who had previously backed several credit union-friendly bills, included language to a deficit reduction and tax reform bill that called for the credit union federal tax exemption to be phased out over a five-year period from 2013 through 2017. The exemption was one of 29 federal tax expenditures targeted for elimination.

The response was immediate. NAFCU lobbyists met that same day with members of Ross’ office on Capitol Hill to tell them what ending the exemption would mean. Following the meeting, plans to phase out the exemption were dropped from the bill, with Ross’ office noting that it was included in a drafting error. It took just six hours for the threat to be removed.

The two biggest takeaways are when lawmakers involved in deficit reduction talks say “everything is on the table,” they mean it, and the credit union industry must remain vigilant in its efforts to build on the support it has for the exemption.

We can’t assume that the exemption will always be there. Lawmakers involved in deficit reduction talks have made it very clear that there are no sacred cows that will garner special protection as the budget scalpels come out. There is simply no way around the U.S. government’s fiscal issues without some pain being caused.

With that in mind, it has never been more important for credit unions to educate members of Congress about why the exemption is there, the benefits it provides and the destructive impact that eliminating it would have.

We should all remember that Congress decided in 1937 to formally exempt credit unions from paying federal income taxes (but not all taxes) because they are not-for-profit financial cooperatives with a fundamentally different structure than banks. While credit unions have grown by leaps and bounds over the years, our not-for-profit, cooperative structure has remained constant. We are still limited to serving defined fields of membership, have volunteer boards of directors and cannot issue capital stock. Congress reaffirmed the exemption in 1951 and again in 1998.

In addition, it’s important to remember that the exemption enables credit unions to provide some much-needed balance to the financial services marketplace. It’s no secret that banks aren’t lending enough, particularly to small businesses. Thankfully, credit unions are filling the vacuum, providing an essential counterweight to the indifference of the for-profit banks.

A 2011 study commissioned by the SBA’s Office of Advocacy found that credit unions have the ability to offset declines in bank business lending during a recession. The same study also found that bank lending was largely unaffected by changes in credit unions’ business lending–a point our industry continues to drive home with lawmakers as we seek to build support for legislation that would expand credit unions’ ability to make loans to their small business member-owners.

But the fact that banks aren’t doing enough for average consumers is hardly a new development. During the Great Depression, banks were notorious for turning their backs on the financial needs of average citizens. That’s why Congress passed the Federal Credit Union Act in 1934, which established the federal credit union system and made it easier for credit unions to be chartered. The law set the stage for the vibrant growth of the credit union industry that we’ve seen in the ensuring decades, and it is a key reason why credit unions have such an important marketplace presence.

The study also shows that the loss of the credit union tax exemption would cost the federal government $1.5 billion in lost tax revenue–three times the 2010 estimate of the Senate Budget Committee of the forgone revenue of the tax exemption, $148 billion in gross domestic product and 1.5 million in lost jobs over the next decade. Without a doubt, taxing credit unions does not make economic or budgetary sense. We need to bring these facts to the fight.

We need to make sure that every member of Congress understands the importance of the exemption, especially the ones who are making difficult choices about our nation’s finances. NAFCU will continue to vigilantly defend the credit union exemption as we did with the Ross bill, but we need participation from the entire industry on this one.

So get out there. Talk with your congressmen about the value of the exemption. Share findings from our study and talk about your own credit union’s role in its community. Get your members involved, as well. The greater the degree of credit union participation in the battle, the louder our collective voice will be–and the more assured the credit union industry will be of victory.